If I enter 1099-Q in my son's return (a dependent but w/ some earned income), where do I offset that income with qualified edu expenses?

[karsagarwal]

Where does 1099-Q go - my son's return or mine? the qualified expenses are more than the gross distribution, so there should be no tax .... where do the qualified expenses go? I'm assuming that the 1099-T goes in my return. Where do I enter my son's expenses so the 1099-Q  distributions can be offset?

[karsagarwal]

Thanks for the answer. Is it possible to skip the 1099-Q and 1099-T entirely on my son's return and cover it all on the parents' joint return? or both have to go on his, and then ours as well? Or more simply, which of these 2 have to be entered on whose returns? I'm the owner of the 529 account, and my son is the beneficiary, and qualified expenses (less scholarship) are more than the distributions. Thanks again!

[Carl]

All education stuff is reported on one return or the other. But understand that EVERY SINGLE WORD in IRS Pub 970 is carefully chosen and is intended to be interpreted for it's literal meaning. In other words, it leaves no room for doubt. The hard part was assembling my above from the IRS publication, so as to ensure none of the literal meaning was lost. For example, it's not a requirement that that parent provided more than 50% of the students support. The requirement is that the STUDENT did NOT provide MORE than 50% of the STUDENT'S own support - keeping in mind that scholarships and grants do not count for student provided support.
Also, there is no requirement that the parents MUST claim the student. THe requirement is for the student. The requirement reads if the parents "QUALIFY" to claim the student, then the student MUST select the option for "I can be claimed on someone else's return", even if the parent's do not claim the student as a dependent.
There are rare situations for example, where the parents will claim everything except the 1099-Q, and the student will claim/report the 1099-Q. (or everything vice-versa). But it's rare that there's any tax advantage to doing that. I've only seen it once so far, this tax season.

[karsagarwal]

So, in my case (where my son did not provide more than 50% of support) should I ignore all 1099-Q and 1099-T on his return and instead do it on mine? And is there anything to make sure that I don't get taxed on the earnings portion (since the gross distributions was spend on qualifying expenses which are greater than reported in Box 2 of 1099-T)? Thanks again for helping me through this!

[Carl]

I would expect, after reading my initial response, that you the parent are claiming the student as a dependent on your (the parent's) return. If that's the case, then you the parent claim "everything" education related on your (the parent's) return. Understand the limits too. For scholarships/grants, they are *initially* treated as taxable income. The taxability of the scholarship/grant is offset by the *qualified* education expenses they are used to pay for.
The 1099-Q funds are treated *initially* as taxable income. If the scholarships did not cover all qualified education expenses, then the 1099-Q funds are applied to the remaining qualified education expenses. Any 1099-Q funds left over are then applied to "unqualified" (but allowed for 1099-Q funds ONLY) education expenses, such as room and board. Here's two possible scenarios.
 Scholarship - $2000
 529 funds  -   $2000
Tuition - $3000
Room and Board - $5000
The scholarship is applied to the tuition first, leaving $1000 of tuition unpaid. Next, $1000 of the 529 funds are applied to the remaining balance of tuition, leaving $1000 of "taxable" 529 funds left.
The remaining 529 funds are applied to the unqualified but allowed (for 529 funds only) Room and board, thus offsetting the taxability of those remaining funds.
2nd Scenario:
Scholarship - $5000
529 funds =   $2000
Tuition   -       $3000
Room and Board - $5000
$2000 of the scholarship is applied to the tuition, paying it in full. Since scholarship money can ONLY be used for *qualified* education expenses, the remaining $2000 of the scholarship money is taxable income. Even if it's used for room and board.
The remaining taxable $2000 of scholarship money is applied to room and board, leaving a $3000 balance due on room and board. The $2000 of 529 funds is applied to the remaining balancing of room and board, thus canceling out the taxability of the 529 funds only. Taxes will be paid on the excess scholarship money that was not used for *qualified* education expenses.

Generally, no matter what, in a case where grants and scholarships cover all qualified education expenses, the student will report all education stuff on the student's tax return. It does not change the fact that the parent's can still claim the student as a dependent.

[Carl]

You will be asked for 1099-Q info (as well as 1099-T info) when you get to and work through the Education section under the Deductions and Credits tab. When dealing with a 1099-Q it is IMPERATIVE that you work through the education section in interview mode as the program is designed and intended to be used. If you do not, then there's a good chance that you will NOT receive credit for the 1099-Q funds, and those funds will be taxed.

Understand that figuring out who claims the student as a dependent, and determining who claims the education expenses & credits, is two different determinations. It depends on the specific situation as outlined below.

Here’s the general rules gisted from IRS Publication 970 at http://www.irs.gov/pub/irs-pdf/p970.pdf

If the student:

Is under the age of 24 on Dec 31 of the tax year and:

Is enrolled in an undergraduate program at an accredited institution and:

Is enrolled as at least a half time student for one academic semester that begins during the tax year, (each institution has their own definition of a half time student) and:

the STUDENT did NOT provide more that 50% of the STUDENT’S support (schollarships/grants received by the student do not count as the student providing their own support)

Then:

The parents will claim the student as a dependent on the parent's tax return and:

The parents will claim all schollarships, grants, tuition payments, and the student's 1098-T on the parent's tax return and:

The parents will claim all educational tax credits that qualify.

If the student will be filing a tax return and:

The parents qualify to claim the student as a dependent, then:

The student must select the option for "I can be claimed on someone else's return", on the student's tax return. The student must select this option ieven f the parent's qualify to claim the student as a dependent, and the parents do not claim them.

Now here’s some additional information that may or may not affect who files the 1098-T. If the amount of scholarships/grants exceeds the amount of qualified education expenses, the parent will know this when reporting the education on their tax return, because the parent will not qualify for any of the tax credits. (They only qualify for tax credits based on out-of-pocket qualified expenses not covered by scholarships/grants.)  Also, the parent’s will not qualify for the credits depending on their MAGI which is different for each credit, and depends on the marital status of the parent or parents.

In the case where scholarships/grants covers “all” qualified education expenses, the parent’s don’t need to report educational information on their dependent student at all – but they still claim the student as a dependent if they “qualify” to claim the student.

 If the scholarships/grants exceed the qualified education expenses, then the student will report the 1098-T and all other educational expenses and scholarships/grants on the student’s tax return. The student will pay taxes on the amount of scholarships/grants that are not used for qualified education expenses. However, if the student’s earned income reported on a W-2, when added to the excess scholarships/grants does NOT exceed $6200, then the student doesn’t even need to file a tax return, and nothing has to be reported.

If the student has any other taxable income not reported on a W-2, and it exceeds $400, (not including taxable portion of scholarships/grants) then most likely it’s considered self-employment income. That will require a tax return to be filed and the student will have to pay the Self-Employment tax on that income.

Finally, regardless of the student’s W-2 earnings, if any taxes were withheld on those earnings and it was less than $6200, then the student should file a tax return so as to get those withheld taxes refunded.

[ahochfelder]

Not sure I understand.  Can you clarify?

I have two children in college.  Both of their college expenses were covered by direct payments to their schools via qualified 529's.  Both received 1099-Q's.  Both received 1098-T's.  I read that since I am claiming both as dependents, I should report their 1098-T's on my tax return.  I did get a notice that our income is too high to receive any deductions, but I did report those 1098-Ts on my return.   I have a son who had a modest income with very part time work.  His earnings were only $ 1700.  BUT the 1099-Q he received had a little under $ 6k in earnings.  I assumed I report the 1099-Q on his return?   Same for my daughter (her earning will be much higher on her 1099-Q--$ 15k or so).

Since his total W-2 was $ 1700 and my daughter did not work (no other income), are they required to fill out a return at all?

More importantly, if they must file a return, should/can I remove their 1098-T's from my return since my income is too high to receive any benefit?  Are they allowed to include their 1098-T's on their returns even if I claim them as dependents?

[Carl]

I'll keep it simple as best I can, without going into details.

I did get a notice that our income is too high to receive any deductions,

So the student will report the 1098-T on the student's tax return, *if* they are required to file a return, or *if* they choose to file a return.

The student is required to file a return if any one of the following are true.

 - The student's unearned income (not including scholarships, grants, 529 funds) is more than $350 more than their earned income up to $12,200. Example: the student has an investment that paid them $400 and a W-2 job where they made $2000. The student's standard deduction is their earned income (2000) plus $350. So the standard deduction for the student is $2,350. With $400 of investment (unearned) income they will pay taxes on the $50 above their standard deduction of $2,350. A tax return is required to filed.

 - The student's self-employment income "profit" is more than $400. The student will pay self-employment tax of 15.6% on the self-employed "profit" income that exceeds $400. They are required to file a tax return.

With the below, the student is not required to file a tax return, but they might want to anyway.

 - The student's W-2 job paid $2000 and that's the only earned income they have, with no other income (not including scholarships,grants, 529 distributions). The employer withheld taxes on that $2,000 of earned income, and the student want's that withheld money refunded to them. The student does not "have" to file a return. But if they don't, then the taxes withheld by the employer will not be refunded to the student.

As for the 1099-Q, the named beneficiary recipient of the 1099-Q is the one who reports it on their own tax return.